Millennials who are paying rent and making their student loan payments diligently may be daunted by the prospect of saving for a house down payment. This is a common problem: Many millennials are struggling to be able to save money for their first home.
However, if you have the discipline, you can actually save up a lot of money in a relatively short period of time.
Here are some easy steps millennial home buyers can take to save up for a down payment on their first home:
#1 Save the Difference
If you are paying rent right now, a good way to get started with a savings plan is to subtract your rent from your future, estimated mortgage payment. This should include principal, interest, property tax and mortgage insurance. Then, put the difference into your savings account.
This strategy has two benefits. First, it builds your savings for your down payment. And second, it will get you accustomed to your new budget when you own your home.
If you find that you are having trouble meeting your savings target, you may want to think about downsizing your home plans to something more affordable.
It also is important to think of saving for your down payment not as depriving yourself today, but rather as swapping out things you might buy today for something big you want in a few years – your own home.
#2 Move to a Cheaper Rental
If you are paying 30% or more each more for your rent, experts advise to consider moving to a cheaper house or apartment. This will allow you to put more money away each month.
If you want to buy a house but are paying $3000 per month in rent, this could make it difficult to save. Try to move to a $2000 place further out of the city and save the rest.
While moving to a less expensive rental may not be your favorite thing today, imagine the home that you are going to be able to buy with that down payment. There are even a few lenders advertising rent to own loans.
#3 Get a Gift
Most common mortgage lenders today will allow you to get at least some of your down payment as a gift from a family member. Many first time home buyers have benefited from gifts that many competitive loan programs allow. Check to see if the lender you are considering will allow you to do so. If not, consider finding another mortgage company.
#4 You Do Not Need to Save 20%
One of the biggest and persistent myths today is that you must save 20% to make a down payment on a home. We are not sure why this is; it could be that you need to have roughly 20% equity in your home to cancel private mortgage insurance or PMI.
Whatever the reason, you do not need to have 20% down in most cases to buy a home. You may get the best possible rate with a 20% down payment, and of course your payment will be lower with putting more money down.
But today there are many excellent loan programs available for putting well under 20% down:
FHA for First Time Home Buyers: This program is backed by the Federal Housing Administration, and it has very flexible lending criteria. Did you know you can put down as little as 3.5% on a home, and still get a low rate? It’s true. You will have to pay for private mortgage insurance, but that is a small price to pay for putting down just $7,500 on a $200,000 home! You also can have a credit score in the low 600’s and still get approved for a 3.5% down FHA mortgage.
Conventional loans: Conventional loans are about 60% of the mortgage market. These are backed by Fannie Mae and Freddie Mac, and you need to have good credit to get into these programs. However, there are now 3% down programs available in some conventional loan programs. These include the HomeReady mortgage and the Conventional 97 program.
The Bottom Line
Saving for your first down payment on a home can be challenging for many millennials. You are probably not earning as much money today as you will in 10 or 15 years. You also might have to shell out high rent and pay off a $30,000 student loan.
But there are ways that you can save for a down payment, as we noted above. And remember, you do not need to have a 20% down payment in most cases anyway. In fact, many experts argue that putting down less on your home than 20% can make a lot of sense. If you are running through most or all of your savings to put down 20%, this leaves nothing left for fixing up the home or any emergencies.